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FH 5: Payments by New Zealand resident or New Zealand deducting branch producing deduction without income
or “Tax deductions denied for certain overseas payments not treated as income”
You could also call this:

“Exceptions for tax deductions on prerequisite supplies in cross-border transactions”

This law applies when someone (called the payer) pays for goods or services from another person or group (called the payee). It’s about a special situation where the payee can’t get tax deductions for some things they need to buy before they can provide goods or services to the payer.

Here’s what needs to happen for this law to work:

The payee (or someone in their group) must buy something (called a prerequisite group supply) from someone who isn’t connected to them or the payer. The payee’s country doesn’t allow them to deduct the cost of this purchase from their taxes because the payer’s income isn’t taxed in the payee’s country. Also, no other country allows a tax deduction for this cost.

If these conditions are met, some of the money the payer pays to the payee (called the excluded amount) won’t be counted as a mismatch amount for tax purposes. The excluded amount is usually the smaller of either what the payer paid or what the payee couldn’t deduct for the prerequisite group supply.

If there are multiple purchases and sales involved, there are more complicated rules to figure out the excluded amount. These rules make sure that the excluded amounts don’t add up to more than what was paid or what couldn’t be deducted.

You can find more information about how this works in section FH 5(2)(a) and (b) and section FH 5(2)(c) of the law.

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Next up: FH 6: Receipts from non-resident or foreign deducting branch producing deduction without income

or “Money received from overseas that creates a tax mismatch”
Next

Part F Recharacterisation of certain transactions
Hybrid and branch mismatches of deductions and income from multi-jurisdictional arrangements

FH 5BException: when payee group not allowed deductions for supplies as prerequisites for payer supplies

  1. This section applies when expenditure meets the requirements of section FH 5(2)(a) and (b).

  2. For the purposes of section FH 5(2)(c), a supply of goods or services by the person who is the payee for the purposes of that section (the payee) to the person who is the payer for the purposes of that section (the payer) meets the requirements of this subsection if—

  3. a prerequisite for the supply is a supply of goods or services (the prerequisite group supply) received and paid for by the payee or by a person who is a member of the payee’s control group and is resident in the payee jurisdiction; and
    1. the prerequisite group supply is made by a person who, at the time of the supply, is in no control group that includes the payee or the payer; and
      1. the taxation law of the payee jurisdiction allows no deduction from income, and no equivalent tax relief, for an amount (the non-deductible amount) of the payment for the prerequisite group supply because income of the payer is not taxable in the payee jurisdiction; and
        1. no country or territory outside the payee jurisdiction allows a deduction from income for the non-deductible amount or allows equivalent tax relief for the non-deductible amount.

          1. The amount of the consideration for a supply that meets the requirements of subsection (2) (the payer supply) that is an amount excluded from being a mismatch amount (the excluded amount) and is linked for the purposes of paragraph (a) or subsection (4) to a prerequisite group supply is,—

          2. if the payer supply is the sole payer supply to the payer by the payee, or by a member of the payee’s control group, that occurs in or before the income year in which the payer supply is made, and the prerequisite group supply is the sole prerequisite group supply for the payer supply, the amount that is the lesser of—
            1. the amount of the consideration for the payer supply:
              1. the non-deductible amount for the prerequisite group supply; or
              2. if paragraph (a) does not apply, the amount that meets the requirements of subsection (4) for the payer supply and the prerequisite group supply.

                1. If the requirements of subsection (3)(a) are not met for a payer supply and a prerequisite group supply, the excluded amount for the payer supply, together with excluded amounts for other payer supplies, must meet the following requirements:

                2. for a payer supply, the total of the excluded amounts linked to prerequisite group supplies must not exceed the consideration for the payer supply; and
                  1. for a prerequisite group supply, the total of the excluded amounts linked to the prerequisite group supply must not exceed the non-deductible amount for the prerequisite group supply; and
                    1. for each payer supply, the excluded amount that is linked to a prerequisite group supply is the maximum amount that, together with other excluded amounts already linked to the prerequisite group supply, meets the requirements of paragraphs (a) and (b), when—
                      1. the excluded amounts for each payer supply are determined for payer supplies in the order in which the payer supplies are made or, for payer supplies made at the same time, in the order chosen by the payer; and
                        1. the excluded amounts for a payer supply that are linked to prerequisite group supplies are determined in the order in which the prerequisite group supplies are made or, for prerequisite group supplies made at the same time, in the order chosen by the payer.

                        Notes
                        • Section FH 5B: inserted (with effect on 1 July 2018), on , by section 123(1) (and see section 123(2) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).